10th IACC – Prague, 2001
Workshop Report – Negotiating international contracts for large projects: Avoiding
corruption-prone arrangements
Chair:
Dr. Kamal Hossain, Transparency International Bangladesh
Panellists:
T. L. Sankar, former Energy Secretary, India
- Mega Power Projects - India
Oby Ezekwesili, Special Assistant to the President of Nigeria, Nigeria
Jeremy Carver, Partner Clifford Chance, UK
Jeremy Pope, Executive Director Transparency International - Secretariat, London, UK
Discussant:
Michael Wiehen, Chairman, Transparency International Germany, Berlin, Germany
Two case studies were discussed:
1. Power Sector Reforms in India
2. Some public expenditure solutions in Nigeria
Contribution by T. L. Sankar
Power Sector Reforms in India
In 1991, private investment in power was permitted. The arrangements for private sector
investments were reached through negotiation between the utility and the developer, although
tariff guidelines were given by the Government of India. The tariff was a two part tariff. Foreign
currency investments in equity guaranteed 16 per cent in dollar terms on the foreign currency. As
a result, over 100 offers in excess of 26,000 MW were received.
The main problem encountered in the process concerned "payment guarantees". Although eight
projects were given guarantees by State and Central Governments, only three of these have
materialised. In other projects, counter guarantees were insisted upon. Problems of multilevel
negotiations for tariffs resulted in delays.
Significantly, negotiated prices showed wide variations and led to charges of corruption.
The funds for public investment in power were drastically reduced and the power shortage
increased.
During 1996-97, the Governments of Japan, Korea and Germany and others offered to assist
India set up large power projects. The Indian Government established a Standing Independent
Group (SIG) of eminent men to negotiate contracts and finalise the tariff for mega projects (i.e.
over 1,000 MW). The SIG was required to ensure the time taken for processing, bidding and
negotiation should be short.
The SIG undertook initial work in order to develop principles of negotiation:
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pre-negotiation requirements were established
the bidding process was to be a two-stage process
legal and institutional hurdles were addressed
procedural improvements identified.
(For more detail please see paper presented by T. L. Sankar.)
Contribution by Oby Ezekwesili
In Nigeria, major project expenditure has in the past lacked discipline. A new process was
developed called "The due process compliance" as an instrument of compliance for public
expenditure.
This has a number of elements including:
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capital project certification
contract award process
completion of work certification
scrutiny of variations to contracts
Presidential oversight
A lawyer's observations (Jeremy Carver)
There are a number of common elements that can be identified to minimize the risk of corrupt
international contractual arrangements:
1. the necessity to properly and adequately define the project and the project results with
sufficient certainty
2. the recognition that the only good project is one in which there is no corruption involved
3. the requirement to eliminate ignorance about the project otherwise risks are not properly
appreciated or understood; there are risks of inflated contracts and the risk of uncertain
results
4. the need for mutual confidence - in particular, that the contractor has reliably
demonstrated their credentials and capabilities and this has been tested by means of due
diligence
5. lenders must be more prudent in the allocation of funds and have a responsibility to be
accountable to shareholders etc; and
6. the need to identify contractual failures and to verify that the contractual obligations have
been discharged to the level required by the project.
The role of the rule of law and good governance (Jeremy Pope)
To contain the risks of corruption-prone arrangements, we must:
1. recognise the essential role of the rule of law and good governance
2. work to raise the awareness of professional standards of good conduct among
professionals, for example lawyers and engineers
3. increase the risks of the consequences of corruption downstream
4. have mechanisms to identify contracts that warrant scrutiny, even if focusing on those
contracts that appear to be priced at inflated rates of more than ten or fifteen percent
5. have a process that requires a number of sign-offs, including by independent advisers
6. institutionalise transparency in the granting of contracts
7. implement arrangements to penalise those found to have been involved in corrupt
arrangements
Main Themes Covered
1. Prevention is better than cure.
2. How accountability and transparency of government can actually be reflected in major
international projects.
3. The need for equal bargaining power in negotiating contracts to avoid asymmetrical - and
therefore unsustainable - contracts
4. How to bring the activities of local agents into the visible framework of the negotiations
and arrangements to enable scrutiny
Main Conclusions
1. Emphasis on due diligence
o The project should be demand- and not supply-driven.
o At the earliest stage it is extremely important that the total independence and
objectivity of all consultants involved be established.
o The integrity of the environmental and social aspects must be ascertained.
2. Transparency
o The balance between confidentiality and transparency has not been resolved.
o The procurement process must be transparent.
o The process of the evaluation of bids - not just pricing - can give rise to bias and
therefore the process of allocating weighting to bids must also be made public.
3. Clarity
o The terms, conditions and specifications must be clearly articulated and
documented.
o Only the minimum amount of discretion should be permitted in the decisionmaking process.
o Recognise that although most people agree with the principles of competitive
bidding, very few put them into practice.
4. Controls
o Put in place adequate and effective controls that address the corruption risks in
the various stages of the process.
o Some countries have ombudsman schemes and this is even being considered at
a regional level in Germany. Typically, the ombudsman would accept complaints,
investigate complaints and report directly to the parliament.
o With respect to agents, implement requirements that agents only be paid a
proper fee for legitimate services.
5. Incentives
o Build in both incentives and effective sanctions.
o New rules are being introduced for export credit agencies that mean credit is not
available for contracts obtained through corruption. In addition, contractors need
to declare the contract has not been obtained by means of corruption and, if that
statement is violated, cover is denied and, in some cases, fees already paid are
forfeited.
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Commercial banks also need to assume a more involved role and be required to
undertake due diligence. The export credit agencies have not yet imposed
standards on the commercial banks.
Consider the use of the Integrity Pact concept which requires the commitment:
i.
not to pay any bribes
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to disclose all commissions including agents' fees.
The breach of the commitment attracts significant sanctions. There is also a role
for civil society in monitoring government activity.
6. Other suggestions
o There must be political will at the highest level to implement arrangements to
minimise the risks of corruption.
o There must be lawyers prepared to act in the public interest to challenge
corruption-prone arrangements.
o The law itself must be clear.
o There ought to be mechanisms so that successive governments are able to take
some action in respect of corrupt contracts, although cancellation of those
contracts should be a last resort because of the consequences. (See also
Workshop "Contracts taken to international arbitration")